Segmented Income Statements: Analysis of Proposals to Improve Profits Shannon, Inc., has two divisions. One produces and sells paper party supplies (napkins, paper plates, invitations); the other produces and sells cookware. A segmented income statement for the most recent quarter is given below: Party Supplies Division Sales $500,000 Cookware Division Total $750,000 $1,250,000 Less: Variable expenses Contribution margin Less: Direct fixed expenses Segment margin Less: Common fixed expenses Operating income 425,000 460,000 885,000 $ 75,000 85,000 $ (10,000) $290,000 110,000 $ 365,000 195,000 $180,000 $ 170,000 130,000 $ 40,000 On seeing the quarterly statement, Madge Shannon, president of Shannon, Inc., was distressed and discussed her disappointment with Bob Ferguson, the company's vice president of finance. MADGE: "The Party Supplies Division is killing us. It's not even covering its own fixed costs. I'm beginning to believe that we should shut down that division. This is the seventh consecutive quarter it has failed to provide a positive segment margin. I was certain that Paula Kelly could turn it around. But this is her third quarter, and she hasn't done much better than the previous divisional manager." BOB: "Well, before you get too excited about the situation, perhaps you should evaluate Paula's most recent proposals. She wants to spend $10,000 per quarter for the right to use familiar cartoon figures on a new series of invitations, plates, and napkins and at the same time increase the advertising budget by $25,000 per quarter to let the public know about them. According to her marketing people, sales should increase by 10 percent if the right advertising is done-and done quickly. In addition, Paula wants to lease some new production machinery that will increase the rate of production, lower labor costs, and result in less waste of materials. Paula claims that variable costs will be reduced by 30 percent. The cost of the lease is $95,000 per quarter." Upon hearing this news, Madge calmed considerably and, in fact, was somewhat pleased. After all, she was the one who had selected Paula and had a great deal of confidence in Paula's judgment and abilities. Required: 1. Assuming that Paula's proposals are sound, should Madge Shannon be pleased with the prospects for the Party Supplies Division? because it will the segment margin of the Party Supplies Division by $ Prepare a segmented income statement for the next quarter that reflects the implementation of Paula's proposals. Assume that the Cookware Division's sales increase by 5 percent for the next quarter and that the same cost relationships hold. In your computations, do not round percentages used when revising the revenues and expenses. Shannon, Inc. Segmented Income Statement Party Supplies Division Cookware Division Total 2. Suppose that everything materializes as Paula projected except for the 10 percent increase in sales-no change in sales revenues takes place. Are the proposals still sound? The proposals sound if the increase in revenues does not take place. The division and company would What if the variable costs are reduced by 40 percent instead of 30 percent with no change in sales? an extra The proposals will the segment margin of the Party Supplies Division by $ and implemented.